The Romanian government recently opened discussion on a long-awaited draft law aimed at redefining the existing oil & gas royalties system.
For years, one Romanian administration after another had announced their intention to reconsider the Romanian oil & gas royalties system; and every time, this announcement faced strong opposition from industry players, who argued that upward adjustments of the levels of royalties would deter much needed investment in the Romanian oil & gas sector, in particular in the context of the recent decline in oil prices.
Against this background, on 23 October 2017, the Ministry of Economy put up for public debate a draft law regarding the oil & gas royalties system (the "Draft Royalties Law"), inviting interested parties to comment within ten calendar days at email@example.com. The full text of the Draft Royalties Law is available here.
The current national oil & gas royalties system is set forth in the Petroleum Law No. 238/2004 ("Petroleum Law") and concerns only onshore operations. The level of the royalties ranges from 3.5 % up to 13.5 % for crude oil and up to 13 % for natural gas, applicable to gross volumes. Royalties are calculated on the basis of the reference prices determined by the National Agency for Mineral Resources ("NAMR"), based on its own methodology, and are due by the petroleum concession holders to the Romanian State on a quarterly basis.
Although the Draft Royalties Law maintains the same levels of royalties for oil & gas onshore operations as provided under the Petroleum Law, it does introduce certain key changes that will impact the sector, including a separate royalties system for offshore operations and new principles for determining reference prices.
Here is a brief outline of the main provisions of the Draft Royalties Law:
- The Draft Royalties Law includes a much needed stabilisation provision to the effect that the new royalties regime shall not apply to concession agreements in force as of the enactment of the new regime, save for more favourable provisions or for mandatory provisions of EU law. Conversely, concession agreements entered into after the enactment of the new royalties regime shall be subject to the royalties systems provided under the respective concession agreements, throughout their duration, save for more favourable provisions or for mandatory provisions of EU law.
- Different royalty levels apply to onshore and offshore oil & gas operations. While for the upstream onshore segment, the current levels of the royalties is maintained, for the offshore segment, the royalties are based on a fixed component, applicable irrespective of the extracted volumes (8 % for crude oil and 10 % for natural gas), plus a variable component (from 4.5 % up to 5.5 % for crude oil and from 2 % up to 3 % for natural gas).
- If the same offshore oilfield is exploited within two or more areas within the same perimeter, the applicable royalty rate shall be determined by reference to the aggregate gross production of the entire offshore oilfield.
- The royalties due by the oil & gas onshore segment are calculated on the basis of the reference price determined by the NAMR and the gross production registered at the measurement points. If the trading price (which will not include VAT and other taxes) exceeds the reference price, the royalties shall be determined on the basis of the trading price. The reference price, both for offshore and onshore oil & gas operations, shall be determined by the NAMR on the basis of the price of Brent crude and, respectively, the price of natural gas on the centralised market operated by OPCOM, the national centralised energy market operator.
- At the request of the NAMR, the level of the royalties as set in the Draft Royalties Law may be revised by government decision, on the basis of an economic opportunity analysis. Based on the stabilisation provisions, we assume that such revisions would not impact ongoing concessions, unless they resulted in a downward adjustment of the level of the royalties.
- Royalties shall be due monthly (as opposed to quarterly, under the current regime), by the 25th day of the following month. The NAMR shall be obliged to terminate the concession with immediate effect if titleholders fail to pay the royalties for more than six (6) months.
- The Draft Royalties Law sets certain exceptions, such as natural gas accounting for the minimum safety stocks, imported natural gas, natural gas deposited in gas storages and gas re-injected in gas fields for technological purposes, which shall not be subject to royalties. Likewise, crude oil accounting for the minimum safety.
- The Draft Law did not revise the level of the royalties for oil transportation and transit and gas storage activities, which shall remain unchanged.
Once the public debate just launched by the Ministry of Economy has been completed, a final version of the Draft Royalties Law will be prepared and put up for discussion and approval in the Romanian Parliament.
While in its current version, the Draft Royalties Law does not appear to have a significant impact on the ongoing operations of titleholders under existing contracts, the new royalties regime will have to be considered by investors when deciding whether to pursue new projects in the Romanian oil & gas market.